Paths to Equality: Uncovering the Drivers of Income Inequality Reduction in Latin America

This research examines the conditions that contributed to the decreasing income inequality levels in Latin America between 2000 and 2020. Latin America has long stood out as one of the most unequal regions in the world. However, the 2000s saw a region-wide decline in income inequality, but saw diverging national trends in the mid-2010s. While the overall decline is well-documented, there is less consensus about what factors drove it. Existing studies point to various political, structural, economic, and policy factors, but often analyze them acting in isolation. As a result, the interaction between these factors and how they contribute to decreasing income inequality remains insufficiently studied. Due to the complex nature of income inequality reduction and the interaction between causal factors, a fuzzy set Qualitative Comparative Analysis (fsQCA) was employed to examine income inequality reductions across fifteen Latin American countries. Four conditions associated with income inequality decreases were identified from the literature: Labor market formality, the share of skilled workers in the labor force, trade openness, and the presence of left-leaning governments in the executive. The necessity and sufficiency of these conditions for producing income inequality reduction were systematically analyzed using fsQCA set-theoretic methods. The results show that no condition was necessary for income inequality reduction to occur, while two configurations of conditions were found to be sufficient. The first configuration involved low labor market formality, a low share of skilled workers in the labor force, and a high share of left-leaning governments in the executive. The second involved high labor market formality, a high share of skilled workers in the labor force, low trade openness, and a high share of left-leaning governments in the executive. These findings challenge the view that favorable structural conditions are required for income inequality to decrease. Instead, they support arguments for the commitment of left-leaning governments to achieve more equal outcomes through redistributive policies. While the results are limited in their generalizability due to context-specific variation and the presence of outliers, they underscore the need for future research to explore unobserved conditions or case-specific developments. All in all, the findings highlight the importance of configurational approaches to inequality and offer policymakers more nuanced insights into effective, context-aware strategies in the pursuit of achieving greater equality.